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On Aggregate Precautionary Saving: When is the Third Derivative Irrelevant?

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Author Info

  • Mark Huggett

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

  • Sandra Ospina

    (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))

Abstract

When does idiosyncratic earnings uncertainty increase aggregate saving? We address this question in the context of a general equilibrium model where infinitely-lived agents receive idiosyncratic labor endowment shocks, hold a risk-free asset to smooth consumption and face a liquidity constraint. We prove that the steady-state capital stock is always larger in any equilibrium with idiosyncratic shocks and a liquidity constraint than without idiosyncratic shocks (i.e. there is aggregate precautionary saving) as long as utility functions are strictly concave. We also prove that aggregate precautionary saving occurs if and only if the liquidity constraint binds for some agents.

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Bibliographic Info

Paper provided by Centro de Investigacion Economica, ITAM in its series Working Papers with number 9802.

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Length: 25 pages
Date of creation: Jan 1998
Date of revision:
Handle: RePEc:cie:wpaper:9802

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Related research

Keywords: Precautionary Saving; Idiosyncratic Shocks; Liquidity Constraints; Capital Theory;

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Cited by:
  1. Francesc Obiols-Homs, 2003. "Incomplete Unemployment Insurance and Aggregate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 602-636, July.
  2. Marcet, Albert & Obiols-Homs, Francesc & Weil, Philippe, 2007. "Incomplete markets, labor supply and capital accumulation," Journal of Monetary Economics, Elsevier, vol. 54(8), pages 2621-2635, November.
  3. Marco Cozzi, 2012. "Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality," Working Papers 1286, Queen's University, Department of Economics.

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